Financial illiteracy in the Czech Republic and its most common signs. Excessive indebtedness, a poor understanding of the world of finance, a lack of reserves, and unfavourable loans.
You can also easily be brought into a complicated situation by job loss, illness or divorce. Learn to work effectively with your money and actively fight against adversity. Try to limit unnecessary expenses and, when it is truly necessary, choose the most advantageous loan. By doing this, you will create a foundation for a happy and fulfilled life. Do you know how to do it?
What is financial literacy?
This term refers to your ability and skill to effectively manage financial resources in various life situations and at different stages of life. More than that, it’s about thinking about finances, cash flow, and the world in general.
This involves careful management of the household budget, actively building an emergency fund, recording liabilities and receivables, and also planning for the future. Even as business owners, you must consider financial decisions and their consequences.
If you think you don’t have anything to create an emergency fund from, it’s probably more a matter of mindset. It has been proven that even in the highest-paying jobs, there are many people who struggle financially or just manage to get by. This is how things are set up.
Set a clear plan to achieve your goal and try to stick to it strictly. However, be sensible and a little cautious. Properly set up term life insurance (rizikové životní pojištění) will protect your income in case of illness or injury. Insurance for property is similar.
The next step is investing. Only 10% of the population is familiar with this, and the rest either struggle or have no thought of it at all. Investing is about discipline and can subsequently bring financial independence. Generally, the best investments include real estate, which people fairly understand, and investing in capital markets.
You don’t need to understand capital markets so well today if you save disciplinedly into ETFs focusing, for example, on the S&P 500. Ideally, however, you should put your money into several ETFs. A good plan and ETFs are sufficient for people to choose. They don’t need to understand capital markets in depth.
Are you aiming for a new family home? Look for ways to achieve it. Consider your current housing situation, the amount of your savings, and familiarise yourself with mortgage application conditions. Choosing the right bank will safely move you closer to your goal.
💡 Tip: Pay attention to the article regarding the emergency fund: How much is the ideal household reserve?
What is a sign of financial illiteracy?
It usually involves reckless and impulsive actions. Have you ever been in a situation where you felt that a loan with a high interest rate was your only possible solution? Did it complicate your life? If so, reflect on the following situations and decide differently.
A friend has tempted you with beautiful photographs of an attractive family holiday. Your family budget only allows for a domestic holiday. Where to get the money? A loan from a non-bank company seems attractive. However, it is treacherous.
The Christmas season evokes emotions. Pleasing your family with borrowed money, however, has its pitfalls. New Year’s Eve will be followed by the New Year, and then it is necessary not only to lose excess kilograms but also to pay the bill.
You could have effectively avoided unnecessary debt, bankruptcy or insolvency, debt relief (oddlužení) by using your created emergency fund, or alternatively a credit card. This generally offers you an interest-free period.
Is financial illiteracy dangerous?
Ignorance of the law is no excuse. A legal principle that is more relevant than ever. A lack of awareness of the legal consequences of poor financial decisions or failure to comply with legal obligations can easily land you in a complicated situation.
Even a seemingly trivial situation, such as not buying and validating a tram ticket, can unfortunately cost you your “roof over your head”. This is a risk if you or your child ignore the need to address the situation and fail to pay the fine.
The same applies to poorly chosen loans. It is a priority to consider your current financial situation and decide whether you really need to finance a purchase with a loan. Before signing a loan agreement, it is always necessary to thoroughly inform yourself about interest rates and other conditions for its provision.
Another important principle is to address problems promptly. If you become ill or lose your job and consequently have difficulty paying your mortgage due to a reduction or loss of income, it is always advisable to contact the bank and agree on a suitable solution.
Remember that problems that are put off do not resolve themselves; they accumulate, and their consequences can be devastating for you.
Are you able to manage money effectively?
Financial planning and creating a household budget are important for assessing your current financial situation. If you calculate all your income from employment, business or rental properties and compare it with your expenses, you will gain an overview of your financial situation.
Ideally, your income should exceed your expenses, allowing you to save money or invest. Otherwise, you must reassess your expenses and consider reducing them. If you are unable to reduce your expenses, try to earn some extra income for a certain period. You can also find out about your eligibility for a child tax credit.
💡 Tip: Also read the inspiring article: 4 Tips on How to Reduce Your Family Budget
Financial illiteracy and its mitigation
Try to look at saving money comprehensively. The initial impulse may be to buy energy-saving light bulbs, change your mobile operator and energy supplier. The next step is to reduce energy consumption, food, and eliminate expenses on leisure, culture and holidays.
If you find yourself in a difficult life situation, try to invest financial resources only in the most necessary areas. The priority is to ensure the running of the household and the functioning of individual family members.
Buying branded clothing can be replaced with clothes passed down from older children. Also, try not to borrow money unnecessarily during this difficult period. Prioritise a loan from family members over a loan from a bank or non-bank institution.
Financial illiteracy versus financial education
Students in lower secondary schools and upper secondary schools are introduced to the basics of financial literacy. In addition to the classic definition of what financial resources are, where we obtain them and how to manage them, it is necessary to be aware of life priorities.
The number of enforcement proceedings (exekuce) and personal bankruptcies is unfortunately increasing in connection with the economic instability we are currently experiencing. Interest in financial education, which enables you to work more effectively with income and reserves, is growing. Its aim is to protect you from adverse and destabilising life situations. Financial independence and freedom is the goal of many people who, however, do not have good financial habits and are not moving towards this goal.
The Ministry of Finance of the Czech Republic is actively trying to support education in this area. If you are in a difficult life situation, do not hesitate to seek expert information on its website or contact an expert directly.
Consider financial education as a guide to the world of finance. Its aim is to protect your life and health in every situation, both physical and mental health. The basis of success is actively building an emergency fund, carefully checking income and expenses, including re-evaluating them, and building property.
